By Teresa Rivas

Morgan Stanley’s Philip Wan and his team have a note out Thursday, after their roadshow with members of Tencent (0700.HK/TCEHY) management.

Overall, Wan reiterated an Overweight rating on the stock. He writes that the company’s partnership with JD.com should ease price competition (although the transition was partly to blame for softer first-quarter online advertising growth than expected), and that the company is investing in its content. While international expansion is proving more challenging than expected—especially in more mature, developed markets, Tencent is shifting its focus back toward more promising markets and core growth areas.

More highlights from the note below:

Robust mobile gaming business: Mobile gaming sales jumped 200% QoQ to ~US$300mn in 1Q. Tencent’s mobile gamer volume (~120mn DAUs /~200mn MAUs with ~20mn paying) is already bigger than its PC games, with quarterly ARPU for mobile games improving to Rmb80-90 in 1Q. Tencent expects ARPU for its mobile games to gradually converge with that of its advanced casual games (at ~Rmb150) driven by more mid- to hardcore mobile game launches and a more convenient billing channel.

Advertising, the next driver for mobile monetization: In the US, mobile games capture ~32% of the total time spent on mobile, followed by Facebook (~17%), browsers combined (~14%), and social messaging (9-10%). If a similar breakdown applies in China, Tencent could capture 30-40% of the total time spent among mobile users and is well positioned to capitalize on it via advertising. Tencent recently started its performance-based advertising services on mobile and is recording 2-10 times higher click-through rate as compared to the level on PC, yet lower cost per click.

Positive margin outlook: After aggressive investments over the past few years, Tencent now has more flexibility on margins. Tencent expects a more stable headcount growth (already at ~25,000) and marketing spending is likely more event-specific (e.g., subsidizing for booking taxi rides in 1Q) rather than structural. It is enjoying a favorable business mix shift (away from e-commerce but increasing mobile gaming sales with higher margins). Notably, it incurred ~US$150mn losses from search and e-commerce last year and is saving ~US$300mn capexrelated to e-commerce.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.